Working of vat

A value added tax (VAT) is a form of consumption tax. From the perspective of the buyer, it is a tax on the purchase price. From that of the seller, it is a tax only on the value added to a product, material, or service, from an accounting point of view, by this stage of its manufacture or distribution. The manufacturer remits to the government the difference between these two amounts, and retains the rest for themselves to offset the taxes they had previously paid on the inputs.

With a sales tax 

With a 10% sales tax:

• The manufacturer spends Rs.1.00 for the raw materials, certifying it is not a final consumer.
• The manufacturer charges the retailer Rs.1.20, checking that the retailer is not a consumer, leaving the same gross margin of Rs.0.20.
• The retailer charges the consumer Rs.1.50 + (Rs.1.50 x 10%) = Rs.1.65 and pays the government Rs.0.15, leaving the gross margin of Rs.0.30.

So the consumer has paid 10% (Rs.0.15) extra, compared to the no taxation scheme, and the government has collected this amount in taxation. The retailers have not paid any tax directly (it is the consumer who has paid the tax), but the retailer has to do the paperwork in order to correctly pass on to the government the sales tax it has collected. Suppliers and manufacturers only have the administrative burden of supplying correct certifications, and checking that their customers (retailers) aren't consumers.

A large exception to this state of affairs is online sales. Typically if the online retail firm has no "presence" in the state where the merchandise will be delivered, no obligation is imposed upon the retailer to collect sales taxes from "out-of-state" purchasers. Generally, state law requires that the purchaser report such purchases to the state taxing authority and pay the sales tax. It is fair to say that many citizens are unaware of this obligation and that states make little effort to raise that awareness or provide a reasonably easy way of complying with the obligation.

With a value added tax 

With a 10% VAT:

• The manufacturer spends Rs.1.10 (Rs.1 + (Rs.1 × 10%)) for the raw materials, and the seller of the raw materials pays the government Rs.0.10.
• The manufacturer charges the retailer Rs.1.32 (Rs.1.20 + (Rs.1.20 × 10%)) and pays the government Rs.0.02 (Rs.0.12 minus Rs.0.10), leaving the same gross margin of Rs.0.20. (Rs.1.32 – Rs.0.02 – Rs.1.10 = Rs.0.20)
• The retailer charges the consumer Rs.1.65 (Rs.1.50 + (Rs.1.50 × 10%)) and pays the government Rs.0.03 (Rs.0.15 minus Rs.0.12), leaving the same gross margin of Rs.0.30 (Rs.1.65 – Rs.0.03 – Rs.1.32 = Rs.0.30).
• The manufacturer and retailer realize less gross margin from a percentage perspective.
• Note that the taxes paid by both the manufacturer and the retailer to the government are 10% of the values added by their respective business practices (e.g. the value added by the manufacturer is Rs.1.20 minus Rs.1.00, thus the tax payable by the manufacturer is (Rs.1.20 – Rs.1.00) × 10% = Rs.0.02).

With VAT, the consumer has paid, and the government received, the same dollar amount as with a sales tax. The businesses have not incurred any tax themselves. Their obligation is limited to assuming the necessary paperwork in order to pass on to the government the difference between what they collect in VAT (output tax, an 11th of their sales) and what they spend in VAT (input VAT, an 11th of their expenditure on goods and services subject to VAT). However they are freed from any obligation to request certifications from purchasers who are not end users, and of providing such certifications to their suppliers.

On the other hand, they incur increased accounting costs for collecting the tax, which are not reimbursed by the taxing authority. For example, wholesale companies now have to hire staff and accountants to handle the VAT paperwork, which would not be required if they were collecting sales tax instead. If you calculate the added overhead required to collect VAT, businesses collecting VAT have less profits overall than businesses collecting sales tax.

The advantage of the VAT system over the sales tax system is that under sales tax, the seller has no incentive to disbelieve a purchaser who says it is not a final user. That is to say the payer of the tax has no incentive to collect the tax. Under VAT, all sellers collect tax and pay it to the government. A purchaser has an incentive to deduct input VAT, but must prove it has the right to do so, which is usually achieved by holding an invoice quoting the VAT paid on the purchase, and indicating the VAT registration number of the supplier.

Limitations to the examples 

In the above examples, we assumed that the same number of widgets were made and sold both before and after the introduction of the tax. This is not true in real life.

The supply and demand economic model suggests that any tax raises the cost of transaction for someone, whether it is the seller or purchaser. In raising the cost, either the demand curve shifts leftward, or the supply curve shifts upward. The two are functionally equivalent. Consequently, the quantity of a good purchased decreases, and/or the price for which it is sold increases.

This shift in supply and demand is not incorporated into the above example, for simplicity and because these effects are different for every type of good. The above example assumes the tax is non-distortionary.

This argument of limitations also assumes perfect competition, ignores post-scarcity, ignores artificial scarcity, ignores government-granted monopoly and other real life factors typically taken into account by economists when dealing with these issues. It is here to present a very simplified argument of limitations to illustrate possible arguments coming via the group of macroeconomic thought known as supply-side economics.

Limitations of VAT

The entire amount of the government's income (the tax revenue) may not be a deadweight drag, if the tax revenue is used for productive spending or has positive externalities – in other words, governments may do more than simply consume the tax income. While distortions occur, consumption taxes like VAT are often considered superior because they distort incentives to invest, save and work less than most other types of taxation – in other words, a VAT discourages consumption rather than production.A VAT, like most taxes, distorts what would have happened without it. Because the price forsomeone rises, the quantity of goods traded decreases. Correspondingly, some people areworse off by more than the government is made better off by tax income. That is, more is lost due to supply and demand shifts than is gained in tax. This is known as a deadweight loss. If the income lost by the economy is greater than the government's income; the tax is inefficient. It must be noted that a VAT and a Non-VAT has the same implications on the microeconomic model.

In the diagram on the right:

• Deadweight loss: the area of the triangle formed by the tax income box, the original supply curve, and the demand curve
• Governments tax income: the grey rectangle that says "tax revenue"
• Total consumer surplus after the shift: the green area
• Total producer surplus after the shift: the yellow area

thanks alot sir....for such  important detail....

you are welcome 

Hello Maheshji,

Please let me know how to apply for a VAT or TIN number in UP and the fees and formalities needs to be fulfill.

Thnaks and Regards,

Mudit Narang

What is the Procedure to obtain TAN?

An application for allotment of TAN is to be filed in Form 49B and submitted to any Tax Information Network Facilitation Centres (TIN-FC).Application for TAN can also be made online at NSDL-TIN website.

Which Statutory body grants TAN?

Income-tax Department allots TAN number on the basis of the application filed at TIN-FCs or online NSDL-TIN website. It is the responsibility of NSDL to inform the applicant about his TAN after completion of the whole process.

What documents are required to be filed while applying for TAN?

No documents are needed to be filed along with the application for allotment of TAN. But those who are applying online must forward the signed acknowledgment produced after filling up Form 49B to NSDL. Form 49B pdf 
Deductors who do not have a valid TAN can apply for one by submitting a duly filled and signed Form 49B to any of the TIN-FCs managed by NSDL.

Is the same TAN valid for both TDS and TCS?

Yes, no separate TAN is required for TCS.

What are the charges to be paid while applying for a TAN?

The processing fee for the TAN application is ₹ 60.00 (₹ 55.00 application charge + 10.3% Service Tax) go through this link and fill out required information and get your TAN application status online 

How can i check the status of my TAN Application?

Track PAN/TAN Application Status. Go through this link and fill out required information and get your TAN application status online 

Can a deductor/collector of tax own more than one TAN?

If a person or company has already been allotted a TAN No. than he must not apply for another, because it is illegal and contrary to law. However, a deductor's/collector's different branches or divisions can each apply for TANs for their respective branches or divisions.

How to Apply for Change or Correction in TAN data?

In case of deductors who want Change or Correction in data associated with their reformatted 10 digit TAN may fill up the "Form for Change or Correction in TAN data". Form for Change or Correction inTAN data 

and visit this official website for information of fees and formalities